Taking the first step to start investing can be a scary endeavour. For one, you need to deal with the possibility of losing your hard-earned money and the fact that financial products can be pretty complicated. There is also a misconception that you will need quite a large amount of capital to start investing. As with learning anything, it's always good to start by reading up to understand more before you take the plunge, but the truth is you can start investing with as little as a few thousand dollars.
We've listed a number of investment options below for those who have $5,000 to spare and the range goes from 'safe' investments to those who are willing to take on more risk for higher potential returns.
Singapore Saving bonds (SSB)
We've all heard of government or sovereign bonds, a type of investment instrument that is often seen as 'safe' because they are usually backed by the government. To put it simply, when an investor buys a bond security, they are effectively lending money to the government and the returns is simply the amount of interest they receive for lending the money.
The Singapore government launched the Singapore Savings bond late 2015 and meant it as a low-cost investment option for individuals. These are fully-backed by the government and there is no risk of capital losses. You can invest for up to 10 years and the interest increases over time; the longer you save, the higher the interest returns you will get. You can start with as little as $500 and it also allows you the flexibility to withdraw the funds when you need them, albeit losing the potential of getting the full calculated returns. Don't expect it to pay great though, since safer investments typically come with a lower rate of return. For the SSB, you can expect to earn a total amount of $908 if you invest for 10 years, which translate to an effective return of 1.79% per year.
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Stocks are probably a good buy for those who are seeking a balance between risk and returns. Buying a stock in Singapore is easy – walk into a brokerage and open an account, check out the lists of stocks available on the Singapore Exchange(SGX) and you can buy the stocks you want. The price you see listed is for 1 share and Singapore shares are usually sold in lots of 100. So if you want to buy a particular stock that is going at $1.50 per share, you will be able to buy more than 30 lots with $5,000.
Stocks-picking will be a challenge to a beginner. Perhaps the best way to start is to go by a sector you are interested in, or look at some of the blue-chip stocks that pay out dividends on a recurring basis.
If choosing a stock proves too much of a chore to you, you can always buy into an Exchange-traded fund(ETF) that tracks the Straits Times Index. This will give you the diversification you need since you are buying into a basket of stocks that are vested in different sectors. Feeling more adventurous? You can look into buying the stocks and indices of other countries as well!
Gold is an interesting asset class to look into. Culturally, the precious metal has a special place in the hearts of the Chinese and Indians as they wear gold during special occasions such as during marriage and other important celebrations. In the investment world, it provides a good diversification tool since it is often inversely correlated with the stocks market.
There are a number of ways to invest in gold – buying physical jewellery, bars and coins or even trade paper gold through ETFs and futures. The way you choose should reflect your risk appetite and time horizon. For beginners, buying an ETF that tracks the price of gold would probably be one of the best ways since there it trades like stocks, unlike futures which are highly leveraged and volatile.
Peer-to-peer lending (P2P)
P2P lending provides a platform that pools together sums of money from individual investors to lend them out to small businesses which may not have access to traditional forms of financing. On one hand, businesses with little credit records are able to get the loan they need without going through a bank, and individuals are able to get interest returns by lending money to these small businesses. The model started in 2005 in the UK with Zopa, and has spread to Asia and even Singapore.
Typically, companies that need loans will provide details of the loan amount they are seeking, what they will use the money for and the interest payments you will receive. Minimum investments are usually quite small($1,000) and they may provide interest returns of 15 to 25% per annum with a short investment horizon typically lasting just 12 months. Sounds like a good deal, considering that putting your spare cash with the fixed deposit account in a bank gives you somewhere between 0.5 to 2% maximum. Well, the problem is p2p lending comes with a high amount of risk, where the worst that can happen is a default where you may never see your capital again. The platforms providing the service are not liable since they only act as an intermediary for the transfer of funds. So if the returns sound too good to be true, it probably is.
The point is there is a myriad of products available for any type of risk appetite, so take your pick, and stop procrastinating about growing your wealth! If you are new to investing and would like to trade online with an easy-to-use programme, check out our top picks for beginners. And always remember, invest thoughtfully and cautiously.
Article Written by Lynette Tan